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Master limited partnerships have enjoyed two years of strong returns as yield-hungry investors scooped up these vehicles, which pay out most of their operating cash flow as tax-deferred dividends. But opportunities may remain for total returns of 14% to 20%, particularly among MLPs that collect steady fees from pipelines and related operations.

MLPs, which invest in U.S. energy infrastructure, outperformed the broad market in the past decade. They are only minimally correlated with other assets such as real estate and crude oil, which also enhances their attraction. Unit prices sank in 2008, but the Alerian MLP Index of 50 energy partnerships returned 76% in 2009, one of industry's best years ever. The index is up another 33% in 2010, with components yielding an average of 6%, compared with a total return of 13% year-to-date for the Standard & Poor's 500, which yields 1.9%.

As unit prices have appreciated, yields have fallen from a peak of 23% in late 2008. But MLP yields still look attractive relative to alternatives, including 10-year Treasuries, now yielding 3.28%. Plus, yields can grow as energy companies, spurred by the incentives of tax savings and payouts, place more assets into limited-partnership structures. MLPs typically hold energy transportation, storage and production assets. Pipeline and storage MLPs collect fees from energy distributors and customers but have limited exposure to commodity prices.

Plains' operations form a web from Canada through the Western U.S., and to the Gulf of Mexico. Wells Fargo estimates that 80% of the MLP's revenue is fee-based, which has enabled the partnership to increase its distribution to shareholders by 8% in the past five years, to $3.75 annually. Plains raised $260 million through a unit offering in November that will help it fund future projects and reduce total debt, which equals about 55% of total capitalization, in line with peers.

Western Gas' distributions to partners have grown dramatically in its two years as a public enterprise. They rose by 13% in the past 12 months, to $1.39 a share, for a yield of 5%. Anadarko has "dropped" four assets into Western Gas since the offering. Such "methodical, strategic execution creating value," Sinclair notes, provides clarity with regard to future growth.

Wells Fargo Securities thinks Western Gas can boost distributions 14% annually in the next three years, one of the biggest prospective increases in the firm's MLP coverage universe. Jeremy Tonet, an MLP analyst at UBS Investment Research, has a price target of 32 for Western Gas units, about 8% above the current price of 29.50.

Tonet thinks Plains could reach 71 in 2011, although he sees little change in the yield. But that doesn't mean the dividend won't grow; according to Wells Fargo, Plains has said it can boost the yield 3% to 5% long-term.

Western Gas' enterprise value is 18 times the past 12 months' Ebitda of $171 million. The multiple is closer to 14 times after excluding the distribution paid to the Anadarko-controlled general partner. Enterprise value doesn't include the general partner. Plains fetches 14.6 times EV to trailing Ebitda of $981 million.

The Bottom Line

The Alerian MLP Index returned 76% last year and is up 33% in 2010. Yet individual MLPs such as Plains All American and Western Gas still have room to rally. Both also have juicy yields.

These valuations are attractive in view of the likely addition of new assets and resulting rise in yield. Moreover, the energy sector is expected to shell out billions in the next 20 years to bring new oil, gas and related liquids to market, and MLPs will be a beneficiary. Many new shale-gas plays, for instance, aren't linked to pipelines yet.

MLPs aren't without risk. A spike in interest rates would elevate their cost of capital and likely facilitate an investor exodus to more attractive assets. But such an increase seems unlikely for at least a year.